Edge in Selling Options Part I: The Buy-Write

Edge in Selling Options Part I: The Buy-Write

Summary2015 was a great year for buy-writes; 597 bps of alpha was gained over the market due to elevated volatility and a stagnant market.Despite market myths, approximately 30%-35% of options expire worthless.Investors should be aware of the utility options provide for their own purposes or for when evaluating a portfolio manager.Alpha in Buy-WritesAlpha can be elusive. Many investors spend their careers chasing fads and attempting ill-fated trades to hopefully boost their performance. Finding these opportunities, historically, required a research team and other scarce trading resources. Now more than ever, these capabilities are freely available to investors through technology. Interest in extracting alpha via options has brought forth the rapid adoption of options as a risk management and return enhancement tool. As such, it’s essential to explore the benefits, risks, and opportunities options strategists provide.The options revolution began with the launch of electronic trading and the penny pilot program, where options spreads were allowed to be quoted in penny increments. As the cost of trading dropped, both commissions and bid/ask spread-wise, options exploded in popularity, showing consistent volume growth since their inception in 1973. From a macro point of view, options can provide a variety of opportunities. They can serve as an equity type investment vehicle, all the way to being utilized for pure speculation. Options can also be used as a strategic additional source of income when overlaid with stock, also known as the buy-write (most commonly, a long stock and short out-of-the-money call combination).Buy-writes combine the best of both stock selection strategies and time-decay oriented option selling. While similar in risk to a short put, buy-writes provide exposure...
So the Fed Raised Rates…Now What?

So the Fed Raised Rates…Now What?

Summary: Markets and managers are expecting two or three interest rate hikes in 2016, likely to occur on a meeting date with a press conference.The U.S. is leading the charge on higher rates, while China is slowing and the ECB is expected to actually cut rates further into negative territory.Default risk is indeed higher globally, likely due to the commodity bear market, but other measures of risk such as implied volatility show little signs of uncertainty.Janet Yellen is in a tight spot. Domestic economic indicators seem to be strong compared to the rest of the world, but a backdrop of diverging international economies seem to have gotten the better half of other central banks.Despite these concerns, the Fed stuck to its plan of raising interest rates in December to 0.25%, kicking off a new interest rate regime. Going forward, investors will need to look at the 2016 calendar for clues as to when the Fed will raise again. While there is nothing clear cut, plenty of speculation is in the market. The new age “briefcase indicator” seems to be FOMC meeting dates that have a press conference associated with them.  There are four opportunities for this in 2016. One of the largest asset managers in the world, Pacific Investment Management Company (PIMCO), foresees a base case scenario that includes three 25 basis point rate hikes, “consistent with where the central bank’s core leaders have indicated they are leaning for 2016, but greater than the two rate hikes that the bond market is priced for.”Markets are currently assigning a 14.1% chance, as of 01/13/2016, that PIMCO’s base case is correct...